We always wonder about the width and the deep of the current crisis in France. In this short paper I present measures of it.
The first easy way to look at it is to watch GDP, the most complete measure of economic activity. That’s what is shown on the first chart. GDP level is in purple and the red line is a trend that has been estimated from 2000 to Q1 2008. The aim of this trend is to show the difference in GDP dynamic before and after the start of the crisis.
Since the second quarter of 2011, GDP level is flat meaning that growth rate is close to 0%. The break is clear on the chart.
The immediate question is to try to imagine how to change this trajectory. We could imagine that world trade impetus could do that. That will not be the case as world trade momentum is low. This means that change will have to come from inside. That’s the rationale for structural reforms. The target is at the end to improve French economic efficiency. But we know by experience that these kind of reforms take a long time before being efficient. As this kind of change have costs in the short term, we can have questions on austerity policies that depress demand. The risk is lower momentum in activity and higher unemployment as it has been seen in most European countries that have tried this recipe.
The second question is to know if the current period is specific or is it a dynamic already seen in the past?
Just ook at the second chart. It is the same GDP data but on a longer period. The chart starts in 1950.
The current period is unique when we look at the last 60 years. Comparisons with the last two recessions show that 1974, after the first oil shock, was a temporary shock and that the 1992/1993 recession was mild. None of them can be compared with the current situation. In another paper in this blog I show the GDP trajectory after each of these 3 recessions. The current one is the only one where the GDP is still below its previous cycle peak.
We can try another way ot looking at the data. The third chart presents the same data but on a five year change profile. Five years is often associated with business cycle time. Not too short to avoid immediate disequilibrium but long enough to allow for adjustments. It is a period where demand is still important and supply can play an important role.
With the same data I show the five year change (at annual rate) on the chart below.
This graph shows the different growth periods France has had since World War Two. The “30 glorieuses” after the war and before the 1st oil shock. Growth rate was between 4 and 6% each year. It was the catch up period. Growth was strong and the labor market at full employment.
After the first oil shock the trend has changed and growth is on average close to 2%. During this period there was a kind of mean reversal process with growth coming back to 2% after a shock positive or negative.
During the last period, since 2008, we see that for the first time GDP growth on a five year period is negative. The shock was strong and persistent and the French economy was not able to absorb it. We have here a very simple measure of the crisis, its depth and its width.
But is the French economy the only one to follow this trend? In the chart below a comparison is made with the USA, the United Kingdom, Germany and Italy.
The dynamic has changed everywhere. The United Kingdom and Italy are in a weaj situation as their last numbers are clearly negative. GDP level at the end of 2012 is well below its end of 2007 level. France is in a kind of median situation. We see that the rebound in the USA is not what it used to be. For Germany the time serie is too short but its situation is far from being bas.
The lesson is that the shock was strong and persistent but this shock came on sometime weak economy with high private indebtedness. This led to inertia in the adjustment process. That’s what Reinhart and Rogoff have shown in their famous book “This time is different”, it takes a long time to recover after a financial crisis. The current risk in Europe and in the USA after the sequestration is fiscal policy which could try to hasten the adjustment process. The risk is then to diverge from the full employment trajectory for a long time period.